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Did KushCo Meet Analysts’ Expectations in Q1 2020?

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KushCo Holdings reported its fiscal 2020 first-quarter results yesterday after markets closed. Analysts expected the company to post double-digit percent revenue growth in the quarter. It reported double-digit percent revenue growth in all four quarters of fiscal 2019. Vaping concerns in the US have affected the company’s business. Let’s look at whether KushCo met analysts’ expectations in the first quarter.

KushCo’s first-quarter results

In fiscal 2020’s first quarter, the company’s net revenue increased by 38% YoY (year-over-year) to $35 million, missing analysts’ estimate of 41.4 million by 15.6%. However, the revenue declined sequentially because of the vaping crisis. The company attributed its revenue growth to medical state sales, which rose 51% sequentially. Florida, Pennsylvania, and Maryland contributed to the revenue growth. However, KushCo’s recreational marijuana sales growth was on the lower side. The company faced a supply issue in California. Cannabis sales in the state contributed only 22% of the company’s total revenue in the first quarter.

I discussed yesterday how the lack of retail stores and black market sales are affecting cannabis sales in California and other states. Canada is also bearing the burden of illicit cannabis activities. The company’s Canadian revenue grew 174% YoY in the first quarter.

Analysts expected KushCo to report a loss of $0.10 per share in the first quarter. However, its loss came in higher, at $0.12 per share. The company also reported EBITDA of -$12.8 million, compared with analysts’ expectation of -$6.4 million. KushCo stated in its press release that its gross margin expanded for a fourth consecutive quarter. In the first quarter, the company also raised $30.1 million in capital, and realized $4.3 million in net annual cost savings from workforce reduction, which it expects to benefit EBITDA growth.

KushCo’s views on the results

In KushCo’s first-quarter earnings release, co-founder, chairman, and CEO Nick Kovacevich said, “Building off of an exceptional year for KushCo in fiscal 2019, Q1 2020 helped us start off the new fiscal year on the right foot, with significant progress on all fronts operationally and financially. From an operational standpoint, we made major inroads in restructuring and right-sizing the business, including completing a sizeable reduction in force, reducing our stock-item SKU count, cutting non-essential costs, tightening our inventory management, and further streamlining our operations, which will be reflected in our results going forward.”

Fiscal 2020 outlook

The vaping crisis in the US affected many cannabis companies’ sales. Recently, the CDC (Centers for Disease Control and Prevention) confirmed that vitamin E acetate found in illegal vape products caused the vaping-related health issues. However, sales of legitimate products by cannabis companies were affected. KushCo’s revenue paid a price, too. Despite the concerns, management is confident that the issue will be resolved soon and market dynamics will improve. Peer companies Canopy Growth (NYSE:CGC) (TSE:WEED) and Aurora Cannabis (NYSE:ACB) are also launching vape products this year.

Additionally, KushCo expects recreational marijuana revenue growth in Michigan and Illinois. Illinois legalized cannabis on January 1. Recreational marijuana sales also started in December in Michigan.

KushCo is hopeful about its Cannabis 2.0 products launch in Canada. The company reiterated its net revenue guidance for fiscal 2020, to $230 million–$250 million. The company expects net revenue from its hemp trading business to surpass $25 million in fiscal 2020, and it foresees positive EBITDA growth in the year’s second quarter.

Changes in analysts’ recommendations after earnings

Analysts haven’t changed their recommendations after the earnings release. Of the nine analysts covering the stock, six suggest “buy,” and three rated it a “strong buy.” However, they have lowered their average 12-month target price by 10%, to $4.94. That price implies a 219% upside based on the stock’s closing price of $1.69 yesterday.

Whereas most analysts covering OrganiGram (NASDAQ:OGI) suggest “buy,” most covering HEXO (TSE:HEXO) and Cronos (NASDAQ:CRON) suggest “hold.”

As of 11:24 AM ET today, KushCo stock was trading 7.6% lower. Its decline could be because the company missed analysts’ revenue and earnings estimates. Year-to-date, KushCo stock is up 3.0%. In 2019, the stock lost 73.4%. Meanwhile, OrganiGram lost 68.65%, and Cronos and HEXO fell 32.1% and 69.7%, respectively.

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